2. A key factor in analyzing the industry-level effect of an environmental regulation is to study the so-called market-adjustment (or industry output-adjustment). Suppose that we are looking at the market for orange juice and the market for red wine. It is safe to assume that the demand for orange juice is relatively inelastic and the demand for red wine is relatively elastic. Assume that both industries are operating under constant marginal cost conditions. Let the government introduce industry regulations that raise the marginal cost of production in both industries. For simplicity, assume that the marginal cost rise equally in each industry. a. Draw a graph of the demand curves facing these two industries. Show on your graph how an increase in marginal cost affects the price and output in each industry. Clearly label your graphs and curves. b. Which industry is likely to experience a larger market adjustment (or output adjustment)? Explain your answer. c. Which market is likely experience larger adjustment cost due to these regulations? Explain.

2. A key factor in analyzing the industry-level effect of an environmental regulation is to study the so-called market-adjustment (or industry output-adjustment). Suppose that we are looking at the market for orange juice and the market for red wine. It is safe to assume that the demand for orange juice is relatively inelastic and the demand for red wine is relatively elastic. Assume that both industries are operating under constant marginal cost conditions. Let the government introduce industry regulations that raise the marginal cost of production in both industries. For simplicity, assume that the marginal cost rise equally in each industry. a. Draw a graph of the demand curves facing these two industries. Show on your graph how an increase in marginal cost affects the price and output in each industry. Clearly label your graphs and curves. b. Which industry is likely to experience a larger market adjustment (or output adjustment)? Explain your answer. c. Which market is likely experience larger adjustment cost due to these regulations? Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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2. A key factor in analyzing the industry-level effect of an environmental regulation is to study the so-called market-adjustment (or industry output-adjustment). Suppose that we are looking at the market for orange juice and the market for red wine. It is safe to assume that the demand for orange juice is relatively inelastic and the demand for red wine is relatively elastic.

Assume that both industries are operating under constant marginal cost conditions. Let the government introduce industry regulations that raise the marginal cost of production in both industries. For simplicity, assume that the marginal cost rises equally in each industry.

a. Draw a graph of the demand curves facing these two industries. Show on your graph how an increase in marginal cost affects the price and output in each industry. Clearly label your graphs and curves.

b. Which industry is likely to experience a larger market adjustment (or output adjustment)? Explain your answer.

c. Which market is likely to experience larger adjustment cost due to these regulations? Explain.

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